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Greenhaven Road Capital 2Q17 Letter – TripAdvisor, Ferrari, Yatra Warrants, Market Outlook

Greenhaven Road Capital 2Q17 Letter, August 3, 2017

  • Fund returned approximately 10% during 2Q, pushing YTD returns above 30%; compared to S&P 500 and Russell 2000 which were up 9% and 5%, respectively

Top Positions

  • Fiat Chrysler (FCA): If the turnaround continues to be successful, Fiat will earn in excess of $5 next year and have a net cash position
    • Will benefit from margin expansion as their product mix shifts away from commodity sedans and increasingly towards luxury cars and SUVs
    • Several ways to realize value, including selling off the parts business or spinning off the luxury brands, as they have already done with Ferrari
    • Strong businesses with strong brands and reasonable balance sheets do not trade for 2x earnings for long
    • Either the company will fall short of its 2018 plan and today’s prices will seem reasonable or they will continue to execute and today’s prices will be deemed quite attractive
  • EnviroStar (EVI): Shares have doubled in the six months that we owned them
    • Commercial laundry operation is growing through a buy and build strategy
    • Math of such roll-up strategy is very compelling: if you buy companies paying 4x EBITDA using stock that trades at 10x+ and cash generated, returns can be astounding
    • There is a lot of execution risk in roll-ups and time will tell if CEO is up for the job but he has committed significant personal and family capital to EVI and thus far has made all the right moves
  • ETSY (ETSY): Share price appreciation has come faster than expected as an activist and 2 PE funds have entered the picture
    • CEO was replaced and layoff have pared back the workforce by roughly 22%
    • New management has been well-received by investors to date
    • Etsy is an interesting platform that is an alternative to Amazon
    • Company has monetization problems but presents a great opportunity to service creative entrepreneurs
  • Limbach Holdings (LMB): Price of Limbach shares are below our average cost
    • Has an opportunity to grow by pursuing additional geographies and adding complementary products such as electrical wiring and fire suppression
    • Margins could expand through an increased focus on higher margin services, roll-off of a larger low margin project, and more conservative bidding for new work
    • There is exposure to commercial building, particularly in hospitals, education, and entertainment
    • Company’s strong management team, significant order book, and logical strategy with clear demonstrations of progress underpin our thesis

New Investment – TripAdvisor

  • Advantaged travel platform, operating in the massive $1.3 trillion travel industry with an asset-light business model that takes no inventory
  • A variety of competitors also aggregate a supply of hospitality offerings on their platforms but TripAdvisor seems the best at providing customers with information to make informed decisions and driving demand for properties
  • Today, TripAdvisor receives more than 250 reviews per minute and has more than 500 million reviews in aggregate
  • Restaurants and hotels that are positively reviewed often proudly display TripAdvisor sticks in their windows or on their doors, effectively serving as free advertising for TripAdvisor
  • Company also has direct relationships with properties and will allow for direct bookings
  • Value proposition for the consumer across the platform is quite high – flywheel effect where TripAdvisor offers more products and choice, leading to more bookings, increased usage and repeat usage; all of this results in increased revenue per user, which leads to the ability to grow the user base as well as increased monetization potential and brand loyalty (product gets better with more users and harder to replicate)
  • Shares of TRIP are near 5-year lows in terms of price – down 65% off of their highs – and short interest has risen
  • Over the last 5 years, unique monthly usership has increased four-fold and reviews per active user have doubled, indicating that engagement is far healthier than the share price
  • Unfortunately, currently has a monetization problem or as a positive parent might say – a monetization opportunity
  • Number of contributing factors to this problem including increased usage of mobile phones, which monetize at lower rates; more significantly, pay-per-click traffic lessened when their Instant Booking option launched; in addition, discounted pricing offered in connection with the kickoff plus user interface issues have led to lower monetization of hotel-related traffic
    • However, revenue per hotel shopper has been steady improvements as the product has matured, with last quarter’s improvements returning to 2015 levels
  • Also facing increased competition from Trivago which is aggressively pursuing growth in the hotel shopper segment, spending in excess of 80% of revenue on sales and marketing while TripAdvisor just increased to 55% after spending below 50%
  • In the intermediate term, monetizing hotel shoppers will be the driving determinant of company economics but there is opportunity in destination attractions
    • Just 7% of reviewed attractions are bookable on TripAdvisor
  • Can now purchase TRIP shares for 17x this year’s cash earnings or 3x EV/sales
  • While revenue dropped with last year’s botched rollout of Instant Booking and under-monetized traffic, company has historically grown revenues at more than 20% per year and Q1 2017 saw revenue growth in excess of 5%
  • Has a history of growing profitably and ownership group includes Liberty’s John Malone

Repurchase of an Old Investment – Ferrari

  • Shortly after Fiat spun off Ferrari, sold the shares arguing that I was a value investor at heart and would not be able to hold the higher multiple “luxury brand” Ferrari when the company hit an inevitable rough patch
  • Ferrari has proven that volumes will increase above the historical 7,000 car-per-year cap
  • With high fixed costs and significant excess capacity in the existing manufacturing footprint, incremental volumes have very attractive economics
  • Incremental margins on $2M La Ferraris are close to eye-popping
  • Also indicated willingness to rationalize or steady its Formula 1 spending
  • One of the greatest auto brands remaining in the hands of one of the greatest auto executives with levers to pull on models to release, production numbers, and pricing presents an interesting set-up

New Investment – Yatra Warrants

  • Made a smaller purchase this quarter in the warrants of Yatra, an online travel agent focused on India
  • Warrants are effectively an option to purchase shares for $11.50 any time in the next five years
  • Position was “smaller” because the risk of permanent capital loss was greater since the warrants, which have a 5-year life, could ultimately be worth zero
  • OTA’s benefit disproportionately from rising incomes – as the #2 provider in its market, Yatra has a very reasonable valuation and is selling at a deep discount to the number one company in the space (MakeMyTrip)

Outlook

  • We are in a market with a complete lack of volatility – in the first 6 months, there were a record low number of days where the market moved 1% or more in either direction
  • Volatility is not dead – it will return; there are a lot of tense people who kind of understand the market and who love their portfolio almost as much as their children
  • When volatility does rear its head, CNBC will be filled with those people who think they saw a shark or heard a smart person scream “shark”, so they will scream it even louder
    • My job is to be like the lifeguard, watching the water in moments of calm and panic
  • Every past market crash looks like an opportunity but every future market crash looks like a risk
  • I suspect we will muddle along with 2% GDP growth, limited volatility, and a growing importance of ETFs – when the crash comes, I know it will be short-term painful and likely long-term profitable

Image Source: Twitter @GreenhavenRoad

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